Underlying Adjusted EBITDA margins improved further to 46.4% (2016: pro-forma CCY 44.2%) through continued focus on operational efficiencies.

Transcription

1 12 July 2017 Micro Focus International plc Unaudited preliminary results for the year 30 April 2017 Micro Focus International plc ("the Company" or the Group, LSE: MCRO.L), the global enterprise software product group, announces unaudited preliminary results for the year 30 April Revenues in the year were $1,380.7m, slightly above the mid-point of management s guidance range, 0.9% lower than the prior year s pro-forma constant currency ( pro-forma CCY ) revenues, $1,392.7m. Underlying Adjusted EBITDA** of $640.9m was 4.2% higher than the $615.3m delivered in the prior year on a pro-forma constant currency basis ( pro-forma CCY )*. Adjusted diluted earnings per share increased by 19.7% to cents (2016: cents) and the full year dividend increased by 32.1% to cents (2016: cents). In March 2016 the Company announced it had entered into a definitive agreement to acquire the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. and its subsidiaries (together, "Serena" or "the Serena Group"). The acquisition completed on 2 May 2016 and consequently trading results of Serena are included in the results for the year 30 April 2017 set out below. In September 2016 the Company announced it had agreed with Hewlett Packard Enterprises ( HPE ) to merge with the software business assets of HPE ("HPE Software") by way of merger with a wholly owned subsidiary of HPE. The transaction is expected to complete at the beginning of September this year with the listing of consideration shares on the London Stock Exchange ( LSE ) and the simultaneous listing of the American Depositary Shares ( ADS ) on the New York Stock Exchange ( NYSE ). Exceptional preacquisition costs have been incurred in the year and will be incurred up to Completion in FY18. Key highlights On a reported basis: o Total revenues of $1,380.7m (2016: $1,245.0m), an increase of 10.9%. o Adjusted EBITDA** of $651.1m (2016: $546.8m), an increase of 19.1%. o Underlying Adjusted EBITDA increased by 20.4% to $640.9m (2016: $532.5m) On a pro-forma CCY* basis to provide a better comparison of like-for-like performance: o Total revenues of $1,380.7m (2016: pro-forma CCY $1,392.7m), a decrease of 0.9%, driven by : Strong SUSE Product Portfolio performance where revenues grew by 21.2% on a pro-forma CCY* basis; On plan performance in Micro Focus Product Portfolio with expected reduction in maintenance and Serena revenues. o Adjusted EBITDA of $651.1m (2016: pro-forma CCY $629.9m), an increase of 3.4%. o Underlying Adjusted EBITDA of $640.9m (2016: pro-forma CCY $615.3m), an increase of 4.2%. Underlying Adjusted EBITDA margins improved further to 46.4% (2016: pro-forma CCY 44.2%) through continued focus on operational efficiencies. Completion of the Serena acquisition took place on 2 May 2016 for an Enterprise Value of $540.0m on a cash and debt free basis, partially funded by a share placing in FY16 of 10.9m shares at a price of 1,455 pence raising 158.2m ($225.7m) before expenses. Exceptional costs incurred in the year of $97.3m (2016: $27.9m) relate to integration costs, acquisition costs, pre-acquisition costs, property costs, severance and legal costs. Improved cash generation in the year: o Cash generated from operations was $564.8m (2016: $456.1m) representing 102.0% (2016: 87.9%) of Adjusted EBITDA less exceptional costs. o Net debt at 30 April 2017 was $1,410.6m (: $1,078.0m) down from $1,625.0m following the Completion of the Serena acquisition on 2 May o Net debt to Facility EBITDA** for the year to 30 April 2017 is a multiple of 2.1 times (2016: 1.9 times), reducing from 2.5 times following the acquisition of Serena; medium-term target remains 2.5 times. Growth in diluted adjusted earnings per share of 19.7% to cents (2016: cents)*** Second interim dividend increased by 17.3% to cents per share (2016: final dividend cents per share) resulting in a full year dividend of cents per share (2016: cents per share), an increase of 32.1% in line with twice covered dividend policy. 1

2 Statutory results Operating profit of $293.4m (2016: $294.9m) Profit before tax of $196.3m (2016: $195.4m) Basic earnings per share of cents (2016: cents) a decrease of 7.5%*** The table below shows the reported results for the Group at actual exchange rates for the year 30 April 2017 and the year together with pro-forma CCY comparatives: Results at a glance Growth /(Decline) 30 April 2017 Pro-forma CCY* % 30 Apr 2016 Revenue Total Revenue $1,380.7m $1,392.7m (0.9%) $1,245.0m - Licence $308.4m $333.0m (7.4%) $304.8m - Maintenance $720.7m $754.5m (4.5%) $644.5m - Subscription $298.7m $245.5m 21.7% $248.9m - Consultancy $52.9m $59.7m (11.4%) $46.8m NON GAAP MEASURES Adjusted EBITDA** $651.1m $629.9m 3.4% $546.8m Underlying Adjusted EBITDA** $640.9m $615.3m 4.2% $532.5m STATUTORY MEASURES Profit before tax $196.3m $278.1m (29.4)% $195.4m Earnings per share *** Basic 68.88c (7.5)% 74.50c Diluted 66.51c (7.1)% 71.61c Diluted adjusted c 19.7% c Dividend per share 88.06c 32.1% 66.68c Net debt $1,410.6m 30.9% $1,078.0m * Group results presented for the year 30 April 2017 include the post-acquisition period results for Serena, GWAVA, OpenATTIC and OpenStack. Due to the significant size of the Serena acquisition the directors believe that the Group results are better understood by looking at the comparative results on a pro-forma basis for the combination of Base Micro Focus and Serena. The directors do not consider the other acquisitions to be of a significant size and therefore have not presented their results in the pro-forma comparatives. Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena s revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the year 30 April 2017 the directors have combined the unaudited financials for Serena for the year 31 January 2016 with the audited figures for Base Micro Focus for the year. From the date of acquisition, 2 May 2016 to 30 April 2017, Serena contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax. ** In assessing the performance of the business, the directors use non GAAP measures Adjusted Operating Profit, Adjusted Operating Costs and Adjusted earnings per share, being the relevant statutory measures, prior to exceptional items, amortization of purchased intangibles and share based compensation. Adjusted EBITDA is the Adjusted Operating Profit prior to depreciation and amortization of purchased software. Underlying Adjusted EBITDA removes the impact of net capitalization/amortization of product development costs and foreign currency gains and losses from Adjusted EBITDA whilst Facility EBITDA is Adjusted EBITDA before amortization and impairment of capitalized product development costs. A reconciliation of these profit measures is given in note 8. *** Earnings per share are detailed in note 13. 2

3 Kevin Loosemore, Executive Chairman of Micro Focus, commented: This has been a significant year for Micro Focus with the announcement of the combination with HPE Software to create one of the world s largest pure play software companies. The transaction is on track to complete on 1 September when Micro Focus will list the consideration shares on the London market and the American Depositary Shares on the New York Stock Exchange. Operationally we have delivered revenue of $1,380.7m, slightly above the mid-point of the zero to minus 2% growth rate range given at the beginning of the year when compared with pro-forma CCY revenues for FY16, with revenues 0.9% down from $1,392.7m. Mergers and acquisitions continue to be a key component of our strategy. Whilst the key strategic announcement in the period was the HPE Software transaction we also completed the acquisitions of Serena, GWAVA Inc., OpenATTIC, and the OpenStack IaaS and Cloud Foundry PaaS talent and technology assets. Over the last six years we have completed and successfully integrated 10 acquisitions and on completion of the HPE Software transaction will have increased the revenue of the business approximately 10 fold since Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions. As promised, immediately prior to completion of the HPE Software transaction, we will declare a return of value of $500m, approximately $2.17 per share, to our existing shareholders. They have also seen their dividend increase to cents from cents per share last year in line with our twice covered dividend policy. Enquiries: Micro Focus Tel: +44 (0) Kevin Loosemore, Executive Chairman Mike Phillips, Chief Financial Officer Tim Brill, IR Director Powerscourt Tel: +44 (0) Juliet Callaghan Simon Compton About Micro Focus Micro Focus (LSE: MCRO.L) is a global enterprise software Company supporting the technology needs and challenges of the Global Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our product portfolios are Micro Focus and SUSE. Within Micro Focus our solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity and Access Security, IT Development and Operations Management Tools, and Collaboration and Networking. For more information, visit: SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions that give enterprises greater control and flexibility. For more information, visit: Forward-looking statements Certain statements in this preliminary statement of results are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. 3

4 Executive Chairman s Statement The year 30 April 2017 was a significant year for the Group. On 7 September 2016 the Company and Hewlett Packard Enterprise ("HPE"), announced that they had agreed that Micro Focus would acquire HPE's software business segment ("HPE Software") by way of merger with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software. This major transaction is on track to close at the beginning of September this year with the listing of consideration shares on the London Stock Exchange ( LSE ) and the simultaneous listing of the ADS on the NYSE ( Completion ). Micro Focus existing shareholders will also be entitled to receive a Return of Value which in total will be $500m that will be declared immediately prior to Completion. This will create a global infrastructure software business with pro-forma revenues in the 12 months to 30 April 2017 of approximately $4.4 billion and Underlying Adjusted EBITDA of approximately $1.4 billion making it one of the largest dedicated software companies in the world and a leading technology stock on the LSE. Following Completion we will align our financial year end to 31 October and will initially report an 18 month financial period ending 31 October This will enable us to launch the new Company s financial year with effect from 1 November During the year 30 April 2017 the Micro Focus business traded in line with the expectations we had set at the beginning of the year. This was achieved during a year of significant change and distraction as we; Completed the acquisition of Serena Software Inc. ( Serena ), together with three other smaller acquisitions; Integrated Serena into the Micro Focus Product Portfolio; Entered the FTSE 100 on 6 September 2016; Became the spin/merge partner for HPE Software; Began to work on the plan for integrating HPE Software; Completed required regulatory filings in the UK, USA and elsewhere; Refinanced the Company s existing debt; and Raised new banking facilities to enable the Completion of the HPE Software transaction and the Return of Value. We have believed for some time that there are significant segments of the infrastructure software market that have matured. The response to this is consolidation. To be successful in this stage of a market both operational effectiveness and scale are critical. We believe that Micro Focus is now well positioned to lead in this space. There is a clear customer requirement for a company that can innovate and extend the life of mature software assets. Like the Attachmate Group ( TAG ) and Serena acquisitions, the combination with HPE Software has clear business logic to extend Micro Focus market presence in mature infrastructure software segments; to increase the operational efficiency of the combined Group; to deliver effective product management focused on customer centered innovation and improve sales productivity. It is 100% consistent with the Company s strategy which, as you will see in the following pages, has not had any significant changes from the plan laid out five and a half years ago. Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions. The Company has a business strategy, a financial strategy, an operating plan and an incentive strategy that all support our objective to achieve 15% to 20% compound annual return for shareholders. Since IPO in 2005 until 30 April 2017, the annual compound shareholder return over 12 years has been 29.3%. Adjusted diluted earnings per share have grown from cents in 2006 to cents in 2017 and dividends per share have grown from 6 cents to cents with respective compound annual growth rates of 25.7% and 27.7% respectively. When we announced the acquisition of TAG on 15 September 2014 we set out the four phase plan below for the combination of the businesses whilst continuing to deliver sustainable shareholder returns. Financial FY2015 FY2016 FY2017 FY2018 Phase Assessment Integration Stabilization Growth Actions Deliver plans for Standardize systems Stabilize top line Top line growth FY15 Rationalize Properties Improve GTM Standardize Detailed review of Rationalize Legal entities productivity systems combined New Go to Market ( GTM ) Growth from new Rationalize legal businesses model areas entities Invigorate Product Maintain/improve cash Improved profitability Management conversion Standardize systems Rationalize underperforming Rationalize Legal elements entities New market initiatives 4

5 The only changes to this original plan which are reflected in the table above are that our detailed review concluded that the integration of systems supporting the new business will extend throughout the four year period and the rationalization of legal entities will extend through FY17 and beyond. This has now been superseded by the plan to adopt new systems being implemented in HPE Software. This software stack will give us one of the most up to date system stacks in the industry and serve as a scale platform for further mergers and acquisition ( M&A ) integration. We have set out a new four phase plan below for the combination of the Micro Focus and HPE Software businesses whilst continuing to deliver sustainable shareholder returns. Financial FY2017 FY2018 FY2019 FY2020 Phase Assessment Integration Stabilization Growth Actions Deliver plans for Standardize systems Stabilize top line Top line growth FY17 Rationalize Properties Improve GTM Click and repeat! Detailed review of Rationalize Legal entities productivity combined New Go to Market ( GTM ) Growth from new businesses model areas Invigorate Product Maintain/improve cash Improved profitability Management conversion Standardize systems Rationalize underperforming Rationalize Legal elements entities New market initiatives The acquisition of HPE Software may delay the return to revenue growth as we consolidate the HPE Software products. As with prior transactions we expect HPE Software s revenue trend to continue its historical decline until significant change has been implemented. This integration will be delivered by the four year plan that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growth in the medium-term as well as underpinning our margin improvement objectives. We are building a strong platform with the addition of HPE Software. Once we achieve our target cash conversion ratio for the Enlarged Group of 90% to 95% we will generate significant free cash flows from which we can deliver significant returns of value to our shareholders and/or further highly accretive acquisitions. Following our integration review in 2015 we decided that the Group should operate two product portfolios, Micro Focus and SUSE, and have reported the business this way since 1 May Since April 2011, I have held the roles of both Chairman and Chief Executive Officer ( CEO ). In December 2015 we announced that effective from 1 February 2016, I would be Executive Chairman and that Stephen Murdoch and Nils Brauckmann would become CEO of Micro Focus and CEO of SUSE respectively. Stephen and Nils discuss the operating performance of their respective portfolios for the year completed in the CEO reports. Our performance in the year Micro Focus Group delivered revenues and Underlying Adjusted EBITDA of $1,380.7m and $640.9m respectively (2016: $1,245.0m and $532.5m). On a pro-forma constant currency ( CCY ) basis the revenue reduced by 0.9% which is just above the mid-point of the guidance range given at the beginning of the year and re-confirmed at the interims. Our net debt at 30 April 2017 was $1,410.6m and represents a multiple of 2.1 times Facility EBITDA of $673.4m, against our target of 2.5 times. We would like to thank our employees for their continued dedication, commitment and hard work in delivering the full year results. For the year 30 April 2017 bonuses were paid to executive management and non-commissioned staff in Micro Focus in line with the improvement in Underlying Adjusted EBITDA of the Group on a constant currency ( CCY ) basis excluding the impact of in year acquisitions. Staff bonuses will be paid at 45.0% of their on target amount reflecting a 4.5% increase in Underlying Adjusted EBITDA of Micro Focus on a CCY basis excluding the impact of in year acquisitions. Executive Management received the same percentage. Non-commissioned staff fully aligned with SUSE, were targeted 50% on improvement in Underlying Adjusted EBITDA of the Group on a CCY basis excluding the impact of in year acquisitions and 50% on delivery of Annual Contract Value ( ACV ) growth targets in SUSE. Their bonus payment is 75.5% of their on target amount, reflecting stronger than targeted achievement in the ACV component. The amount charged to the consolidated statement of comprehensive income in respect of the Corporate Bonus plan in the actual results for the year 30 April 2017 was $20.8m (2016: $45.6m). 5

6 Delivering value to shareholders The board has adopted a very clear plan of value creation. Our priority is to improve the performance of the business in order to maximize the opportunity to generate modest revenue growth in the medium-term. At the same time we have created flexibility to allow value creation to shareholders through cash distributions or acquisitions as appropriate. We deliver value to our customers through customer centered innovation. We will do nothing that will constrain our ability to achieve organic growth and we are currently investing significant amounts on activities designed to enhance growth. The TAG and HPE Software transactions are transformational in terms of the size of the Group from an operating point of view. It involves the type of transformation that many companies would have said that they needed to go private to achieve out of the public eye. The board and management of Micro Focus believe that it is quite possible to do this on the public market and deliver the resulting increase in value to existing shareholders. The HPE Software transaction was also transformational in terms of market capitalization. The day before the announcement of the transaction Micro Focus had a market capitalization of 4,480.7m which had increased to 5,944.0m by 30 April This increased scale drew the attention of a new set of public company institutional investors and also meant that some existing institutional investors would be unable to hold their investments as we had become too big. We will also list in the USA through an ADS which further expands Micro Focus relevant investor base. Working with our brokers, Numis Securities, we set about establishing a significant increase in our investor relations and outreach to the HPE shareholder base. Following this activity approximately 30% of the Company s shares are now held in North America. The board continues to target a net debt to Facility EBITDA multiple of approximately 2.5 times. This is a modest level of gearing for a company with the cash generating qualities of Micro Focus. We are confident that this level of debt will not reduce our ability to deliver growth, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review. In order to complete the acquisition of HPE Software the Company has ext its revolving credit facility from $375.0m to $500.0m, refinanced its term loan debt of $1,515.2m with an improved repayment profile and raised new term loan debt of $3,485m to complete the transaction and make the Return of Value. At 30 April 2017 we had net debt of $1,410.6m representing a net debt to Facility EBITDA of 2.1 times. On closing of the HPE Software transaction net debt will be approximately $4.6 billion representing approximately 3.3 times net debt to pro-forma Facility EBITDA for the 12 months 30 April The board has adopted a dividend policy of being two times covered by the adjusted earnings of the Group. This policy has delivered a proposed second interim dividend of cents (2016: cents per share), which represents a 17.3% increase on last year s final dividend and gives a total proposed dividend for the year of cents per share (2016: cents), an increase of 32.1%. The dividend will be paid in Sterling equivalent to pence per share, based on an exchange rate of 1 = $1.29, the rate applicable on 11 July 2017, the date on which the board resolved to pay the dividend. The dividend will be paid on 25 August 2017 to shareholders on the register at 4 August Board changes and succession planning At the Completion of the HPE Software transaction the board has announced that Chris Hsu will become CEO and Stephen Murdoch will become Chief Operating Office ( COO ). Nils Brauckmann will continue as CEO of SUSE. To ensure delivery of the integration the board has agreed that I will remain Executive Chairman until the announcement of the first full year results after Completion. This is currently expected to be January During the year there were a number of other board changes which arose due to the conditions of the agreement to acquire HPE Software ( Merger Agreement ). Effective 15 May 2017, Silke Scheiber and Darren Roos joined the board as two of the three independent Non-Executive Directors nominated by HPE pursuant to the Merger Agreement. Upon Completion, John Schultz, the Executive Vice President and General Counsel of HPE, will join the board as the Non-Executive Director nominated by HPE. The board has determined that Mr Schultz will not be independent. In addition, Chris Hsu, who will become CEO of Micro Focus upon Completion, will join the board at that time. An additional independent Non-Executive Director nominated by HPE and to be approved by the Micro Focus Nomination Committee, is expected to be appointed after Completion. Steve Schuckenbrock and Tom Virden both resigned as Directors of Micro Focus, effective 25 April 2017, to ensure that the composition of the board remained in line with the UK corporate governance code and met the requirements of the Merger Agreement. We would like to thank Steve and Tom for their significant contributions to Micro Focus. Stephen Murdoch remains CEO of Micro Focus until Completion and will then become COO and simultaneously step down from the board. We welcome the new members of our board. 6

7 Outlook Following completion of the acquisition of HPE Software, the Group will change its financial year end to 31 October and will report an 18 month financial period ending 31 October Assuming the transaction remains on schedule, the first six months will comprise six months of the current Micro Focus business and two months of the HPE Software business. There will then be a full 12 months trading of both businesses. We anticipate revenues for the current Micro Focus Group business for the six months to 31 October 2017 will be broadly flat on the comparative period. In anticipation of the impending integration of the Micro Focus and HPE Software businesses in November we have put on hold any operational changes in the existing Micro Focus business. We will provide guidance for the combined 12 month period to 31 October 2018 when we report in January 2018 on the Group s performance in the six months ending 31 October Having delivered 12 years of approximately 29.3% compound annual returns to investors we believe we have a strong operational and financial model that can continue to scale and provide excellent returns to our shareholders. Kevin Loosemore Executive Chairman 12 July

8 Financial Review Group results presented for the year 30 April 2017 include the post-acquisition period results for Serena, GWAVA, OpenATTIC and OpenStack. Due to the significant size of the Serena acquisition the directors believe that the Group results are better understood by looking at the comparative results on a pro-forma basis for the combination of Base Micro Focus and Serena. The directors do not consider the other acquisitions to be of a significant size and therefore have not presented their results in the pro-forma comparatives. Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena s revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the year 30 April 2017 the directors have combined the unaudited financials for Serena for the year 31 January 2016 with the audited figures for Base Micro Focus for the year. From the date of acquisition, 2 May 2016 to 30 April 2017, Serena contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax. A reconciliation between the GAAP and Non-GAAP performance measures is given on page 10 (Revenue), page 13 (Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA) and note 8. The Group operates two product portfolios (i) Micro Focus and (ii) SUSE. These are the reporting segments and the cash generating units for the Group. The Micro Focus Product Portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a fund of funds investment portfolio. This portfolio is being managed with a single product development group that makes and maintains the software, whilst the software is sold and supported through a geographic Go-to-Market ( GTM ) organization. Products are organized into five sub-portfolios based on industrial logic. During the year Serena s product set was added to the Development & IT Operations Management Tools sub-portfolio and towards the end of the year GWAVA was added to Collaboration & Networking. SUSE s characteristics are different due to the Open Source nature and the growth profile of its offerings. During the year SUSE made its first acquisition of OpenATTIC, a storage management software solution, and then took over assets and staff from HPE related to OpenStack Infrastructure as a Service ( IaaS ) and Cloud Foundry Platform as a Service ( PaaS ) technology. Our revenue guidance at the beginning of the year was for Group revenues for the full year to grow between zero% and minus 2% when compared to the pro-forma CCY revenues of the comparable period with growth in SUSE expected to partially offset the anticipated decline in the Micro Focus Product Portfolio based on the revenue trends in the sub-portfolios. The performance in the year was in line with management s guidance with overall revenues declining by 0.9% when compared to pro-forma CCY revenues. The portfolios have directly controlled costs and then an allocation of the costs of the support functions that are centrally managed. Set out in the table below are the profitability metrics for our two product portfolios including the breakdown of Adjusted Operating Profit for the year and the reconciliation between Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA (note 8): 30 April 2017 Micro Pro-forma CCY 1 Focus SUSE Group Micro Focus SUSE Group Micro Focus SUSE Group Segment revenue 1, , , , ,245.0 Directly managed costs (564.1) (178.5) (742.6) (633.0) (143.2) (776.2) (566.4) (145.1) (711.5) Allocation of centrally managed costs 26.2 (26.2) (27.3) (28.9) - Total Adjusted Operating Costs (537.9) (204.7) (742.6) (605.7) (170.5) (776.2) (537.5) (174.0) (711.5) Adjusted Operating Profit Margin 50.1% 32.5% 46.2% 47.0% 31.9% 44.3% 45.8% 31.4% 42.9% Adjusted Operating Profit Depreciation of property, plant and equipment Amortization of software intangibles Adjusted EBITDA Foreign exchange credit (2.9) (2.0) (4.9) (3.0) (0.3) (3.3) (2.6) (0.3) (2.9) Net capitalization of product development costs (5.3) - (5.3) (11.3) - (11.3) (11.4) - (11.4) Underlying Adjusted EBITDA unaudited 8

9 The breakdown in revenue within the two product portfolios by revenue type in the year to 30 April 2017 compared to the pro-forma CCY and reported revenues in the year to is shown in the table below: 30 April 2017 Pro-forma CCY 1 Growth/ (Decline) % Micro Focus Product Portfolio Licence (7.4%) Maintenance (4.5%) Subscription Consultancy (12.0 %) , ,142.3 (5.7%) SUSE Product Portfolio Licence Maintenance Subscription % Consultancy (4.1%) % Total Revenue Licence (7.4%) Maintenance (4.5%) Subscription % Consultancy (11.4%) 46.8 Revenue 1, ,392.7 (0.9%) 1, unaudited The table below provides the proportion of revenue delivered during FY17 by each of the portfolios and the comparison to the pro-forma CCY and reported FY16 revenues with Micro Focus broken out into its sub-portfolios: Percentage of FY17 Revenues Percentage of FY16 Revenues Pro-forma CCY 1 Percentage of FY16 Revenues As Reported COBOL Development & Mainframe Solutions ( CDMS ) 19.2% 18.5% 20.8% Host Connectivity ( HC ) 12.7% 14.1% 15.9% Identity, Access & Security ( IAS ) 15.0% 15.4% 17.4% Development & IT Operations Management Tools ( Development & ITOM ) 20.6% 22.7% 12.6% Collaboration & Networking ( C&N ) 10.5% 11.3% 12.9% Micro Focus Portfolio 78.0% 82.0% 79.6% SUSE Portfolio 22.0% 18.0% 20.4% Micro Focus Group 100.0% 100.0% 100.0% 1 unaudited We provide additional Key Performance Indicators ("KPIs") for the SUSE Product Portfolio. Total Contract Value ("TCV") is the amount invoiced to customers (excluding sales tax) in respect of new contracts and renewals completed in the year. The weighted average contract length expressed in months, reflecting the duration of the TCV is also being provided as growth in TCV alone without this information is potentially misleading. Finally we provide Annual Contract Value ("ACV") which aims to normalize contract length by only including the first 12 months of each new contract or renewal included within TCV. Where the contract length is less than 12 months all of the TCV is included in ACV. 9

10 We are not providing renewal rate information for SUSE or Micro Focus. Our methodology is still being refined in order to accommodate data from our multiple systems and we will seek to standardize on a single measure after Completion and integration with the HPE Software business. Once we have a common methodology and are content with the data we will provide clear explanations of both. In the meantime we believe that following the trends on the maintenance revenue for the Micro Focus subportfolios and subscription revenues for SUSE provides the best guidance on performance. The table below shows revenues for the year by region for the year to 30 April 2017 compared to the pro-forma CCY revenue and reported revenue for the year : Micro Focus 30 April 2017 Pro-forma CCY 1 Growth/ (Decline) % North America (5.7%) International (6.1%) Asia Pacific & Japan (4.0%) 89.0 Total 1, ,142.3 (5.7%) SUSE North America % International % Asia Pacific & Japan % 29.6 Total % Group North America (3.1%) International % Asia Pacific & Japan % Total revenue 1, ,392.7 (0.9%) 1, unaudited Detailed analysis of the revenue performance of each of the product portfolios is provided in the CEO reports. Reconciliation of pro-forma CCY revenues to reported revenues for the year 30 April 2016 Micro Focus Serena Currency impact (11.3) Pro-forma CCY 1,142.3 SUSE Currency impact (3.4) Pro-forma CCY Total Revenue 1,245.0 Serena Currency impact (14.7) Pro-forma CCY 1,

11 Operating costs The operating costs (including exceptional costs of $97.3m) for the year 30 April 2017 compared with pro-forma CCY and reported operating costs* for the year are shown below: 30 April 2017 Pro-forma CCY 1 Increase/ (Decrease) % * Cost of goods sold (6.1%) Selling and distribution % Research and development (0.6%) Administrative expenses % Total operating costs 1, , % unaudited *Re-classification of costs for Consolidated Statement of Comprehensive Income Presentation As part of the HPE Software transaction the Company s shares and ADS will be listed on the London and New York Stock Exchange respectively. As part of the regulatory filing process in the USA the Group has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Company s Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets. Cost of goods sold On a pro-forma CCY basis, cost of goods sold for the year decreased by $15.3m to $237.2m (2016: pro-forma CCY $252.5m) of which the exceptional costs were $2.9m (2016: pro-forma CCY $2.8m). The costs in this category predominantly relate to our consulting and helpline support operations, amortization of product development costs and amortization of acquired technology intangibles. Excluding exceptional items, amortization of product development costs of $22.4m (2016: pro-forma CCY $19.5m) and amortization of acquired technology intangibles of $69.1m (2016: pro-forma CCY $75.2m) cost of goods sold decreased by $12.2m to $142.8m (2016: pro-forma CCY $155.0m). The decrease is due primarily to a $7.2m reduction in staff related costs and the yearon-year impact of the reduction in Consultancy revenues. On a reported basis, costs of goods sold in the year increased by $7.0m to $237.2m (2016: reported* $230.2m). Cost of sales increased primarily due to the acquisition of Serena and GWAVA ($17.7m and $0.7m respectively) and exceptional items of $0.7m to $2.9m (2016: reported $2.2m), offset by exchange rate differences of $1.4m and a reduction in staff related costs of $8.6m. Exceptional items are discussed later in this section. Selling and distribution costs On a pro-forma CCY basis, selling and distribution costs increased by $26.2m to $467.1m (2016: pro-forma CCY $440.9m). Excluding the amortization of purchased trade names and customer relationships intangible assets of $143.8m (2016: pro-forma CCY $106.7m), selling and distribution costs decreased by $10.9m to $323.3m (2016: pro-forma CCY $334.2m). Within these costs were exceptional costs of $5.5m (2016: pro-forma CCY $3.8m), thus the underlying costs were $317.8m (2016: pro-forma CCY $330.4m), a reduction of $12.6m (3.8%) on the prior year on a pro-forma CCY basis. Reductions include travel and office costs of $4.2m, staff related costs of $2.1m and marketing costs of $1.9m. On a reported basis, selling and distribution costs in the year increased by $50.8m to $467.1m (2016: reported $416.3m).The acquisition of Serena and GWAVA increased selling and distribution costs by $21.7m and $1.4m respectively. Excluding the acquisitions in the year, selling and distribution costs increased by $27.7m to $444.0m (2016: reported $416.3m). This increase in selling and distribution costs includes an increase in exceptional items of $1.1m to $5.5m (2016: reported $4.4m), an increase in the amortization of purchased intangibles of $37.1m to $143.8m (2016: reported $106.7m) primarily offset by a reduction in staff related costs of $6.2m, a reduction in marketing costs of $2.0m and exchange rate differences of $5.2m. Exceptional items are discussed later in this section. Research and development expenses On a pro-forma CCY basis, research and development costs decreased by $1.1m to $180.1m (2016: pro-forma CCY $181.2m). Excluding exceptional costs of $6.8m (2016: pro-forma CCY $5.8m), the resultant costs were $173.3m (2016: pro-forma CCY $175.4m) a decrease of $2.1m (1.2%). Research and development costs are equivalent to approximately 13.0% of revenue (2016: pro-forma CCY 13.0%). On a reported basis, research and development expenses in the year increased by $15.5m to $180.1m (2016: reported $164.6m). The acquisition of Serena and GWAVA increased research and development costs by $17.3m and $1.1m respectively. Excluding acquisitions in the year research and development expenses decreased by $2.9m to $161.7m (2016: reported $164.6m). The decrease related to a reduction in staff related costs of $8.6m and exchange rate differences $2.8m offset by an increase in exceptional items of $5.5m to $6.8m (2016: reported $1.3m) and a decrease in the capitalization of product development costs of $3.2m to $27.7m (2016: $30.9m). Exceptional items are discussed later in this section. 11

12 At 30 April 2017 the net book value of capitalized product development costs on the consolidated statement of financial position was $49.1m (2016: $43.2m). The impact of net capitalization of internal product development costs was $5.3m (2016: net amortization pro-forma CCY $11.4m). Administrative expenses On a pro-forma CCY basis, administrative expenses increased by $62.6m to $202.9m (2016: pro-forma CCY $140.3m). Excluding share based compensation of $34.5m (2016: pro-forma CCY $30.2m), exceptional costs of $82.0m (2016: pro-forma CCY $12.5m) and an exchange gain of $4.9m (2016: pro-forma CCY gain of $3.3m), administrative expenses decreased by $9.6m (9.5%) to $91.3m (2016: pro-forma CCY $100.9m). The decrease has arisen mostly from a reduction in staff related costs of $8.5m. Share based compensation was $34.5m (2016: pro-forma CCY $30.2m), being ASG costs of $13.6m (2016: pro-forma CCY $10.4m), LTIP costs of $19.8m (2016: pro-forma CCY $18.9m) and Sharesave Scheme costs of $1.1m (2016: pro-forma CCY $0.9m). On a reported basis, administrative expenses in the year increased by $63.9m to $202.9m (2016: reported $139.0m). The acquisition of Serena and GWAVA increased administrative expenses by $10.4m and $2.2m respectively. Exceptional items included in administrative expenses increased $61.9m to $82.0m (2016: reported $20.1m), share-based payments increased by $5.7m to $34.5m (2016: reported $28.8m) and exchange gains increased by $2.0m to $4.9m (2016: reported $2.9m). Excluding acquisitions in the year, exceptional items, share-based payments and exchange gains, administrative expenses decreased by $14.3m to $78.7m (2016: reported $93.0m). The decrease relates primarily to a reduction in staff related costs of $12.2m. Exceptional items are discussed later in this section. Amortization of intangibles for the year was $236.4m (2016: reported $203.3m). This growth is as a result of the acquisition of Serena and GWAVA during the year. Exceptional items Exceptional items in the year were $97.3m (2016: pro-forma CCY $24.9m, reported $27.9m) including: 30 April 2017 Pro-forma CCY 1 Integration costs Acquisition costs Pre-acquisition costs Property costs Severance and legal costs 3.5 (5.2) (4.8) Royalty provision releases - (3.0) (3.0) unaudited On a reported basis exceptional items increased by $69.4m, or 248.7% to $97.3m in the year 30 April 2017 (2016: reported $27.9m). The increase was as a result of an increase in pre-acquisition costs of $52.4m relating to the proposed combination with HPE Software, an increase in integration costs of $4.1m in bringing acquired businesses together with the heritage Micro Focus business, an increase in severance costs of $8.3m primarily related to the Serena acquisition, an increase in acquisition costs of $2.1m, the non-recurrence of the $3.0m royalty provision release, offset by a decrease in property costs of $0.5m. The pre-acquisition costs relate to the acquisition of HPE Software which was announced in September 2016 and is currently expected to complete on 1 September These costs relate to accounting, legal and commercial due diligence work, legal work on the various agreements, professional advisors fees and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business. The integration costs relate to work done in bringing together the base Micro Focus, TAG, Serena and GWAVA organizations into one organization. The acquisition costs relate to due diligence work, legal work on the acquisition agreements and professional advisors fees on the acquisition of Serena and GWAVA. Currency impact During the year to 30 April 2017, 62.4% of our revenues were contracted in US dollars, 21.2% in Euros, 4.5% in Sterling, 3.6% in Yen and 8.3% in other currencies. In comparison, 50.7% of our costs are US dollar denominated, 12.2% in Sterling, 19.6% in Euros, 1.7% in Yen and 15.8% in other currencies. This weighting of revenue and costs means that if the US$: Euro or US$: Yen exchange rates move during the year, the revenue impact is greater than the cost impact, whilst if US$: Sterling rate moves during the year the cost impact exceeds the revenue impact. Consequently, actual US$ EBITDA can be impacted by significant movements in US$ to Euro, Yen and Sterling exchange rates. The currency movement for the US dollar against Sterling and Euro was a strengthening of 13.9% and 1.5% respectively and the Yen weakened by 10.1% when looking at the average exchange rates in the year 30 April 2017 compared to those in the year 12

13 . In order to provide CCY comparatives, we have restated the pro-forma results of the Group for the 12 months at the same average exchange rates as those used in reported results for the year 30 April Intercompany loan arrangements within the Group are typically denominated in the local currency of the overseas affiliate. Consequently, any movement in the respective local currency and US$ will have an impact on the converted US$ value of the loans. This foreign exchange movement is taken to the consolidated statement of comprehensive income. The Group s UK Corporation Tax liability is denominated in Sterling and any movement of the US$: Sterling rate will give rise to a foreign exchange gain or loss which is also taken to the consolidated statement of comprehensive income. The foreign exchange gain for the period is approximately $4.9m (2016: pro-forma CCY gain of $3.3m). Adjusted Operating Costs and Total Operating Costs Adjusted Operating Costs were $742.6m (2016: pro-forma CCY $776.2m) a fall of $33.6m. The reduction in Adjusted Operating Costs arose mostly from a reduction in staff related costs of $23.9m. Total Operating costs were $1,087.3m (2016: pro-forma CCY $1,014.9m) an increase of $72.4m. Adjusted EBITDA and Underlying Adjusted EBITDA Adjusted EBITDA in the year increased by $21.2m to $651.1m (2016: pro-forma CCY $629.9m). Underlying Adjusted EBITDA in the year increased by $25.6m to $640.9m (2016: pro-forma CCY $615.3m) at a margin of 46.4% (2016: pro-forma CCY 44.2%). The increase in Underlying Adjusted EBITDA is larger than the increase in Adjusted EBITDA as Adjusted EBITDA does not include the impact of net capitalization of product development costs and foreign exchange gains or losses. 30 April 2017 Pro-forma CCY 1 Growth/ (Decline) % Revenue 1, ,392.7 (0.9%) 1,245.0 Adjusted EBITDA % Foreign exchange gain (4.9) (3.3) (2.9) Net (capitalization)/amortization of product development costs (5.3) (11.3) (11.4) Underlying Adjusted EBITDA % Underlying Adjusted EBITDA Margin 46.4% 44.2% 5.0% 42.8% 1 unaudited Both revenue and EBITDA in the year 30 April 2017 have been reduced by the unwinding of the fair value deferred revenue haircut of $10.1m (2016: pro-forma CCY $16.6m reported $16.6m) that was applied as part of the acquisitions of TAG, Serena and GWAVA. Reconciliation of pro-forma CCY Adjusted EBITDA and Underlying Adjusted EBITDA to reported Adjusted EBITDA and Underlying Adjusted EBITDA for the year. Adjusted Operating Profit Adjusted EBITDA Underlying Adjusted EBITDA Micro Focus Serena Currency impact Pro-forma CCY SUSE Currency impact Pro-forma CCY Total Serena Currency Impact Pro-forma CCY Operating profit Operating profit was $293.4m (2016: pro-forma CCY $377.8m). Within the operating profit is $97.3m (2016: pro-forma CCY $24.9m) of exceptional costs. Adjusted operating profit was $638.1m (2016: pro-forma CCY $616.5m). 13

14 Net finance costs Net finance costs were $95.8m (2016: pro-forma CCY $97.5m) including: The amortization of $14.2m of prepaid facility arrangement, original issue discounts and facility fees incurred on the Group s loan facilities (2016: pro-forma CCY $13.9m); Loan interest and commitment fees of $81.9m (2016: pro-forma CCY $84.0m); Interest on pension liability $0.6m (2016: pro-forma CCY $0.5m); Other interest costs of $0.1m (2016: pro-forma CCY $0.1m); offset by $1.0m (2016: pro-forma CCY $1.0m) of interest received. Net finance costs have decreased by $1.7m on a pro-forma CCY basis, mostly due to reduced loan interest and commitment fees ($2.1m) offset by an increase in the amortization of prepaid facility arrangement, original issue discounts and facility fees ($0.2m). Profit before tax and adjusted profit before tax Profit before tax for the year 30 April 2017 was $196.3m (2016: pro-forma CCY $278.1m). The profit before tax has decreased by $81.8m in the year when compared to the 2016 pro-forma CCY as a result of an increase in exceptional costs of $72.4m, an increase in the amortization of purchased intangibles following the Serena and GWAVA acquisitions of $29.3m, an increase in the share based compensation charge of $4.3m, offset by an improvement in Underlying Adjusted EBITDA margin to 46.4% (2016: proforma CCY 44.2%). Profit before tax increased by $0.9m on a reported basis from $195.4m in the year to $196.3m for the year 30 April Adjusted profit before tax was $541.0m (2016: pro-forma CCY $516.8m, reported $434.0m) and the table below shows the reconciliation between profit before tax and adjusted profit before tax: 30 April 2017 Pro-forma CCY 1 Growth/ (Decline) % Profit before tax (29.4%) Share based compensation % 28.8 Amortization of purchased intangibles % Exceptional costs % 27.9 Adjusted profit before tax % unaudited Taxation The tax charge for the period was $38.5m (2016: $32.4m) with the Group s effective tax rate ( ETR ) being 19.6% (2016: 16.6%). The ETR on adjusted profit before tax ( Adjusted ETR ) was 22.9% (2016: 23.1%) as set out in the following table. 30 April 2017 Adjusted Adjusted Adjusts measures Adjusts Measures Profit before tax Taxation (38.5) (85.5) (124.0) (32.4) (67.8) (100.2) Profit after tax Effective tax rate 19.6% 22.9% 16.6% 23.1% In computing adjusted profit before tax, $344.7m of adjustments have been made for the items shown in the adjusted profit before tax section, of which the associated tax is $85.5m. The adjusted ETR for the year 30 April 2017 of 22.9% is consistent with 2016 (23.1%). The Group is forecasting an Adjusted ETR in the medium-term, including HPE Software, of approximately 33%. The increase compared to previous medium-term guidance, excluding HPE Software, of 23% to 27% is due primarily to the expected higher proportion of profits subject to higher US tax rates, including US taxes arising on the repatriation of profits from subsidiaries of HPE Software through the US to the UK. The Group is guiding to a cash tax rate on Cash Profits (Underlying Adjusted EBITDA less exceptional items, capital expenditure and interest) for the Enlarged Group of 30%. The forecast Adjusted ETR is subject to various factors including: 14